More plan sponsors revising investment policy to manage risk, Aon Hewitt reports

In an effort to decrease pension risk exposure and insulate their plans from fluctuating economic conditions, companies are increasingly rethinking their investment strategies by realigning their plan assets to match the plan’s liabilities, according to a survey by Aon Hewitt.

Aon Hewitt surveyed more than 220 U.S. companies with defined benefit plans representing 5.8 million workers. According to the results, 62% of pension plan sponsors are somewhat or very likely to adjust their plan’s investments to better match the liabilities in the year ahead, compared to just one-in-six that do so today. Some companies plan to go one step further and adopt dynamic investment policies or glide paths that increase exposure to fixed income and risk-hedging options as their plan’s funded status improves.

The survey found that 22% of employers currently have a glide path strategy in place. By the end of 2014, 30% of companies are expected to have embraced this approach.

“The strong market returns of 2013 improved the funded status of many employers’ pension plans,” said Rob Austin, director of Retirement Research at Aon Hewitt. “Implementing an investment policy that mirrors liability movements as underlying economic conditions change allows plan sponsors to lock in these gains. In addition to changing their investment policy, more companies are establishing holistic de-risking strategies to further guard their plan’s funded status and reduce liabilities.”

Strategies to manage risk

Aon Hewitt’s survey also found that companies are adopting a more thorough approach to monitoring and managing pension risk by focusing on three key areas: (1) understanding potential risk; (2) monitoring funded status; and (3) reducing liabilities.

Understanding potential risk. The survey revealed that nearly a quarter (24%) of pension plan sponsors have recently conducted an asset liability study to get a better picture of their plan’s performance under varying economic conditions, double the number of companies that had done so in 2012. Of the companies that had not yet conducted a study, 45% are somewhat or very likely to do so in the next 12 months.

Monitoring funded status. According to Aon Hewitt, one-in-eight employers have already established a method to monitor daily funded status of its plan, twice the number of employers than in 2012. One quarter of the plan sponsors that do not have this monitoring in place are somewhat or very likely to do so in 2014.

“Employers used to only evaluate their plan’s funded status once each year when they were required to report on the plan’s performance,” explained Austin. “Now they understand that it is critical to have a real-time view of how market and economic conditions are impacting the plan to enable them to adjust and execute their investment strategy at a moment’s notice.”

Reducing liabilities. Pension plan sponsors continue to adopt strategies to limit their liabilities. Lump-sum settlements through a “window” are becoming increasingly popular. The survey disclosed that 12% of plan sponsors recently introduced or expanded the availability of lump-sum windows for retirees or terminated vested participants, and 43% are somewhat or very likely to complete a lump-sum window for inactive participants during 2014.

“As PBGC premiums have increased, the fixed costs of maintaining a qualified pension plan have also increased, making it more desirable for plan sponsors to settle plan liabilities through lump-sum payouts,” added Ari Jacobs, Global Retirement Solutions leader at Aon Hewitt. “These settlements allow companies to reduce their pension obligations while at the same time, give workers access to their retirement funds much earlier than planned.”

Source: Aon Hewitt press release.

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